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Salaries Tax 101

2021-08-24

Salaries tax is one of those time-consuming things everyone dreads facing. You might wonder why sometimes you’ll receive tax return forms, while at other times you do not. When does a tax year start and end? Can it be freely changed according to one’s will? These are questions you might have about income taxation, and we’ll answer each one of them below.

Do I need to pay salaries tax?

According to the Inland Revenue Ordinance, as long as the income you have earned in Hong Kong is from holding any position, employment, or from receiving pension, you must pay salaries tax in accordance with the tax year.

What is a tax year? Does the period of a tax year change?

A tax year is a designated period of time, and cannot be changed under any circumstance. A tax year specifically refers to the 12 months between the first of April in a certain year, and the thirty-first of March of the following year. All income received during this period will be taxed accordingly for that tax year.

Must tax returns be filed?

The Inland Revenue Department usually sends out tax return forms near the first working day of May each year. Even if you have no income, if you receive a tax return form, you must file a tax return within the tax return period. If you miss the deadline, you will have to pay a fine and even go to court, so if you receive a tax return form, don’t ignore it!

Receiving tax return forms in the mail? It’s not down to luck

Every taxpayer has a tax allowance for every tax year (HKD132,000 for 2020/21). If you earn less than the tax allowance, it is unlikely that the IRD will send you a tax return form. If your income exceeds the tax allowance but you have not received a tax return form, it is best to contact the IRD through phone or in person. This is because taxpayers are obliged to proactively notify the IRD in writing before the deadline (within four months after the end of a tax year – before the end of July), otherwise they may be subject to the recovery of taxes, penalties, as well as fines.

What counts as taxable income?

All income derived from work is tax payable, such as:

  1. Salaries, wages, holiday pay;
  2. Reimbursed salaries, end-of-contract bonuses, leaving bonuses;
  3. Commissions, year-end bonuses;
  4. Educational benefits;
  5. Tips from customers;
  6. Accumulated payment in lieu of notice;
  7. Director’s remuneration etc.

A tax year is a designated period of time, and cannot be changed under any circumstance. A tax year specifically refers to the 12 months between the first of April in a certain year, and the thirty-first of March of the following year. All income received during this period will be taxed accordingly for that tax year.

Should income-deducted MPF be included as taxable income?

Does the reported income need to include the Mandatory Provident Fund (MPF) contributed by oneself? When filing income tax returns, you should fill in your income as the amount before deduction of MPF or contributions by recognized occupational retirement schemes. The mandatory MPF contributions made by employees are deductible according to the Inland Revenue Ordinance, and the deductible amount can be filled in as Deductions for Contributions to Mandatory Provident Fund Schemes and Recognised Occupational Retirement Schemes. (The maximum deduction is $18,000).

What counts as expenses that are tax deductible?

According to the Inland Revenue Ordinance, the conditions for claimable deductions are very stringent, because the relevant expenditures must be wholly, exclusively and necessarily incurred in the production of the assessable income.

What does “wholly” and “exclusively” mean?

In simple terms, “wholly” and “exclusively” refers to whether the relevant expenditure is for work purposes. If it is not,then it will need to be apportioned proportionally. For example, let’s say you are a driver who is fully responsible for the daily expenses of a car. If the car was used for both private and work purposes, daily expenses related to the car (e.g. gas) will have to be apportioned proportionally.

What does “necessarily” mean?

“Necessarily” refers to expenses that are unavoidable in the execution of employment and work. If an expenditure is only related to income generation or only helps to generate income, it will not meet the “necessity” criteria.

How is “incurred” defined?

“Incurred” means that the expenses in question are established liabilities. To put it simply, it does not matter whether the expenses have been paid; the crucial thing is that the expenses are debts or liabilities that have become real, are to be undertaken, and have become amounts that are to be paid. Thus, if an expenditure is only a rough estimate, a contingent liability or an estimated future expenditure, it will not be deducted from salaries tax.

Examples of everyday expenses

  1. Transport expenses, which can be divided into two parts: travelling between two or more workplaces, and travelling between residences and workplaces
    1. Traveling between two or more workplaces
      • Can be deducted, as such expenses are necessarily incurred during work and employment. This only applies given that the expenses in question are not reimbursed by one’s employer.
    2. Travelling between residences and workplaces
      • Cannot be deducted, as such expenses are not necessarily incurred during work and employment.
  2. Business entertainment expenses
    1. Most business entertainment expenses are not necessarily incurred during work or employment, and it is also rare for it to be wholly and exclusively incurred during the generation of income. Therefore, most business entertainment expenses cannot be deducted, unless it can be proven that such expenses are necessarily incurred, due to it being directly related to business negotiations. In addition to having detailed information on expenditure and recipients, the records of such expenses should also state the nature of involved businesses in order for the expenses to be considered deductible.

To summarize…

We understand that salaries tax is unavoidable for the average Joe, so that is why we want to share the professional knowledge we have to help you avoid unnecessary penalties and fines. If you still want to know more about salaries tax, please keep following our blog!

Pacers is a company that provides multifaceted and professional consulting services. We are eager to grow with our clients, so if you encounter any issues on taxation, you’re welcome to contact us through our website or email at info@pacersconsulting.com.

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